WAYSON WONG еt al., Plaintiffs and Appellants, v. IRA STOLER et al., Defendants and Appellants.
No. A138270
First Dist., Div. One.
May 26, 2015
1375
Weyand Law Firm, Alexander Michael Weyand and Eric C. Shaw for Plaintiffs and Appellants.
Grathwohl, Rauch & Cohen, Garry K. Cohen; Gary Steven Garfinkle; and Maria J. Garfinkle for Defendants and Appellants.
OPINION
HUMES, P. J.—
I.
INTRODUCTION
Wayson and Susanna Wong bought a hillside home in San Carlos (City) for $2.35 million from Ira and Toby Stoler. Several months after they moved in, the Wongs discovered that they and 12 of their neighbors were connected to a private sewer system and were not directly serviced by the City‘s public system. Believing they had been deceived, they sued the Stolers and the real estate agents who brokerеd the sale alleging various causes of action, including rescission. After the Wongs settled their dispute with the real estate agents for $200,000, a court trial was held on the rescission claim only. Although the court found that the Stolers, with reckless disregard, made negligent misrepresentations to the Wongs, it declined to effectuate a rescission of the contract. Instead, it ordered the Stolers to be, for a limited time, indemnifiers to the Wongs for sewer maintenance and repair costs exceeding the $200,000 they obtained in their settlement with the agents.
On appeal, the Wongs contend that the trial court erred in denying rescission, ordering the alternative relief, and denying them attorney fees. The Stolers contend in a cross-appeal that the trial court erred in denying them attorney fees.
We reverse. We conclude that the trial court declined to effectuate a rescission of the contract based on incorrect justifications and that its alternative remedy failed to provide the Wongs with the complete relief to which they were entitled.
BACKGROUND
A. The Property
The home is located on Sudan Lane, a privately maintained road on the west side of San Carlos in the Los Vientos Highlands area. When the devеlopers built the house and 12 others, they installed a private system to carry sewage from these properties to a connecting point with the City‘s public sewer on a downhill street. Some of the homes on the private system are on a nearby street, Best Court. To meet the connecting point, the private system runs approximately 1,000 feet down a steep, unstable hillside through a public open space and watershed area. At the time the 13 homes were built, the City required the developers to form a homeowners association to maintain, repair, and replace the рrivate sewer lines. No formally incorporated or registered entity was ever formed to provide these functions.
References to the system are contained in two recorded documents entitled “Declaration Conditions, Covenants and Restrictions for Sewer Easements” (CC&Rs), which were recorded against the property in December 1987. The obligations of the servient downhill properties and the liabilities of the easement holders are included in a “Cross-Easement Agreement” recorded in April 1984, and a first amendment recorded in December 1987. The recorded instruments, however, do not clearly attach the easements to the titles of the 13 properties served by the private system.
B. The Purchase and the Improvements
The Wongs bought the property from the Stolers in May 2008 for $2.35 million. Before the close of escrow, the Stolers provided the Wongs with a transfer disclosure statement completed in 2002 by the prior owners, an updated 2008 transfer disclosure statement, and a supplemental sellers’ checklist. These combined documents represented to the Wongs that the property was connected to a public sewer system. And they failed to inform the Wongs about (1) any specifics related to “CC&Rs or other deеd restrictions or obligations“; (2) any “Homeowners’ Association [having] authority over” the property; (3) any “abatement or citations against” the property; (4) any “past or present blockage, backup, overflow or other failure” of the sewer lines or that they had ever been “snaked/rooted“; or (5) “any toxic or hazardous material leakages or spills within a half-mile” of the property.
In a roadside conversation, the parties directly discussed that Sudan Lane is a privately maintained road, and in a follow-up e-mail Mr. Wong specifically asked “is there any homeowners’ assоciation here?” Mr. Stoler replied, “no.”
After they moved in, the Wongs commenced an extensive remodeling project. Mr. Wong did some of the initial demolition work himself, but professional demolition began in early October 2008. The Wongs signed a contract with a general contractor in December 2008. The remodeling cost about $300,000, and it included reconfiguring the garage doors and remodeling the kitchen, a bathroom, and a bedroom closet.
C. Discovery of the Private Sewer System
The Wongs first learned of the private sewer system around November 6, 2008, when they received an e-mail from a neighbor discussing it. Unbeknownst to the Wongs, this neighbor had been the coordinator of an informal homeowners association since 2005. By this time, much of the home was down to the studs as a result of the demolition work.
The Wongs tried to resolve the problem without involving the Stolers. They and other neighbors met with the City and asked it to take possession of the sewer system. In April 2009, the City denied the request and instead proposed that the homeowners enter into a maintenance agreement. The Wongs also worked to no avail to establish a formal structure to oversee the system. When it became increasingly unlikely that their neighbors would come together to form a responsible entity or to enter into a maintenance agreement, the Wongs sought lеgal counsel.
D. Commencement of Litigation and Trial
The Wongs sued the Stolers for negligence, negligent misrepresentation, fraudulent concealment, fraudulent misrepresentation, breach of contract, and breach of fiduciary duty. They also sought rescission of the purchase agreement.
Immediately before trial, the parties argued whether the case should be tried to a jury. The Wongs argued it should, and the Stolers argued it should
At the ensuing trial, the evidence showed that the property owners on the private system never agreed to formalize an association, establish an emergency repair fund, or create a long-term reserve for the system‘s eventual replacement. It also showed that two sewage overflows occurred in 2008, and landslides damaged the pipes.
Experts for the Wongs testified that the 25-year-old system has an expected useful life of 50 more years and is susceptible to damage from fire, erosion, landslides, and earthquakes. They testified that system failure is inevitable given the system‘s steep hillside location and existing tension cracks. According to the experts, the cost to replace two of the lines would be between $592,000 and $740,000.
Mr. Wong testified that he reviewed all the transaction materials given to him by the sellers, including the preliminary title report. He stated that the combination of the 2002 and 2008 transfer disclosure statements, together with Mr. Stoler‘s representation that there was no homeowners association, misled him about the property‘s sewer service. He explained that he believed that the reference to a “CC&R/easement” in the preliminary title report pertained to a public sewer line running under the private road because he had been told that the property was on a public sewer and the 2002 transfer disclosure statement referenced CC&Rs solely in the context of the road and driveway.
The evidence established that the Stolers participated in forming an informal association—the Los Vientos Highlands Sewer Association—to pay for sewer maintenance. The Stolers contributed money to the association, and Mrs. Stoler was an initial signator оn the association‘s bank account. Evidence was presented that the Stolers had, but failed to give the Wongs, a copy of the original Cross-Easement Agreement, which referenced the City‘s requirement that a homeowners association be formed. Evidence was also presented that the Stolers failed to disclose they had received a letter from the City reminding them and the other owners about the obligation to form an association as “part of the privately owned and maintained sewage disposal system.” This letter was actually a notice of abatement, and the evidence therefore showed that the Stolers knew that the private sewer system had leaked.
E. Statement of Decision
The court found that the Stolers acted with reckless disregard in negligently misrepresenting the material facts about the true nature of the sewer system and the existence of the informal association loosely established to maintain it. The сourt further found that the misrepresentations affected the property‘s value and that the Wongs would not have bought the property if they had known about the private sewer system and the informal association.
Nonetheless, the court denied rescission because of the “practicality of unwinding the transaction” and because of the undue burden it would place on the Stolers. The court reasoned that the Stolers had purchased a new home over four years ago and had spent $100,000 in improving it, and the Wongs had spent $300,000 improving the property and had removed a significant amount of thе original landscaping. The court determined that, given the “burden that rescission would place on the Stolers,” rescission was neither a fair nor appropriate remedy.
Instead of granting rescission, the court fashioned alternative equitable relief in the form of declaratory relief and an equitable decree of indemnity. As to the declaratory relief, the court found that there is an “unincorporated association in existence through which the 13 owners must carry out the terms and conditions of the equitable servitudes set out in the CC&Rs,” and the Wongs, as one of the 13 owners, are members of it. The court declared that pending any quiet title action or agreement to make the sewer easements appurtenant to the 13 affected lots, the Wongs and the other 12 owners had an equitable servitude that ran with the land. But, recognizing that the other 12 owners were not before the court, the court stated that it was only determining the rights and obligations as between the Wongs and the Stolers. Thus, the court declared that the Wongs “have only a 1/13th responsibility as to the Sudan Lane piece of the line.”
Finally, the court declined to award punitive damages and deemed all other causes of action dismissed. As a consequence of the court‘s ruling, the non-rescission claims were never tried or resolved, much less by a jury as the Wongs had demandеd.
F. Attorney Fees
Each side filed motions for attorney fees. Finding neither party qualified as the “prevailing party,” the court denied both motions. It explained: “[E]ach side here has achieved discernible, and equally substantial, major objectives that each had in the eventual outcome that each respectively sought in this litigation. [The Wongs] have recovered [i]ndemnity protection against the negligently undisclosed repair, maintenance, third party liability risks, and environmental injury risks arising from the shared ownership of the private sewer line servicing their house. At the same time, [the Stolers] have defeated the intentiоnal fraud and deceit claims and have thereby avoided a rescission of their sale of the house to the Wongs, a rescission that would have been extremely disruptive given the changes in position of both [p]arties over the several years since the house was sold.”
III.
DISCUSSION
A. The Appeal: Rescission and Attorney Fees
1. Rescission
a. Applicable Law and Standard of Review
A party to a contract has two different remedies when it has been injured by a breach of contract or fraud and lacks the ability or desire to keep the contract alive. (Akin v. Certain Underwriters at Lloyd‘s London (2006) 140 Cal.App.4th 291, 296 (Akin).) The party may disaffirm the contract, treating it as rescinded, and recover damages resulting from the rescission. (Ibid.) Alternatively, the party may affirm the contract, treating it as repudiated, and recover damages for breach of contract or fraud. (Ibid.)
Before 1961, California recognized two methods by which a party to a contract could obtain rescissionary relief: (1) unilateral rescission, followed by an action to enforce the out-of-court rescission or (2) an action for judicial rescissiоn in which specific judicial relief is granted. (Runyan v. Pacific Air Industries, Inc. (1970) 2 Cal.3d 304, 311–312 (Runyan).) In 1961, however, the Legislature abolished the action to obtain judicial rescission and left only an action to obtain relief based on a party effecting rescission. (Id. at p. 313; see Paularena v. Superior Court (1965) 231 Cal.App.2d 906, 913.)
Consequently, any post-1961 rescission must necessarily be accomplished by a party to the contract. The court does not rescind contracts but only affords relief based on a party‘s rescission. Both the grounds for rescission and the means by which parties may rescind their contract are governed by statute. (See
The steps to rescind a contract are set forth in
Under
Thus,
In rescission cases involving a real estate purchase, “the seller must refund all payments received in connection with the sale. [Citation.] If the buyer has taken possession of the property, the buyer must restore possession to the seller. [Citation.] Such recovery of the consideration exchanged is part of restitution. [Citations.] As consequential damages, rescinding buyers or
Whether to grant relief based on rescission “generally rests upon the sound discretion of the trial court exercised in accord with the facts and circumstances of the case [citations].” (Hicks v. Clayton (1977) 67 Cal.App.3d 251, 265; see Fairchild v. Raines (1944) 24 Cal.2d 818, 826 [“the granting or withholding of equitable relief involves the exercise of judicial discretion“].) “However, that discretion is not an arbitrary one, but should be exercised in accord with the principles and precedents of equity jurisprudence.” (Hicks, at p. 265.)
b. Analysis
(1) The Purchase Agreement Was Rescinded
A straightforward application of the rescission statutes compels the conclusion that the purchase agreement was unilaterally rescinded by thе Wongs. Their complaint expressly alleged numerous grounds entitling them to rescind the purchase agreement, including fraud and negligent misrepresentation, and it specifically sought relief based on rescission. By serving this complaint on the Stolers, the Wongs satisfied the procedural requirements of
In deciding whether to effectuate the Wongs’ rescission, the trial court‘s first task under
We conclude that the trial court erred in declining to effectuate the Wongs’ rescission and in basing its decision on the prejudice to the Stolers. We further conclude that the trial court‘s alternative award was inadequate because it failed to satisfy
We begin by rejecting the argument advanced by the Stolers that the Wongs’ rescission could not have been effectuated by the trial court under
First, the trial court should not have so heavily relied on the potential harm rescission would cause the Stolers. “[W]here defendant has been guilty of fraudulent acts or conduct which have induced the agreement between him and the plaintiff, courts of equity are not so much concerned with decreeing that defendant receive back the identical property with which he parted in the transaction, as they are in declaring that his nefarious practices shall result in no damage tо the plaintiff. Persons who attempt to secure profits by deceitful means may not confidently expect to receive special consideration from courts of equity. In such a case, as a result of the rescission by the court, nothing is exacted from the plaintiff out of particular regard for the condition of the defendant. If his fraudulent acts have resulted in disastrous financial consequences to himself, it is no one‘s fault but his own, and he must sustain the necessary inconveniences thereby entailed. [Citations.] Where it is possible to bring about substantial justice by adjusting the equities between the parties, the fact that the status quo cannot be exactly reproduced will not preclude the plaintiff from equitable relief. No matter what may be the complications or complexities, the powers of a court of equity are so broad as to adequately meet the exigencies of the case and render a decree which will justly determine the rights of the respective parties. [Citations.]” (Arthur v. Graham (1923) 64 Cal.App. 608, 612, first italics added; see Snelson v. Ondulando Highlands Corp. (1970) 5 Cal.App.3d 243, 258 [“In an action predicated on fraud, the fact that the parties cannot be restored to the exact status quo ante will not prevent a court of equity from granting rescission, especially in the light of
Second, based on the record before us, the trial court appears to have been overly concerned with the complications of unwinding the transaction. We recognize that changes have been made to the property and years have transpired. But the changes in the property were commenced before the Wongs learned of the Stolers’ misrepresentations, and much of the time that has elapsed has been due to the Stolers contesting the Wongs’ rescission. As we discussed above, rescission involving a real estate purchase requires the seller to refund the payments received and requires the buyer to restore possession to the seller. (Sharabianlou, supra, 181 Cal.App.4th at pp. 1145–1146.) And consequential damages are allowed such as real estate commissions, escrow payments, interest on specific sums paid to the other
Thus, we remand the case to the trial court to effectuate the Wongs’ rescission and to consider additional relief as apрropriate.6 In doing so, the court is to award “complete relief, including restitution of benefits, if any, conferred by [the Wongs] as a result of the transaction and any consequential damages to which [the Wongs are] entitled.” (
2. Attorney Fees
Because we reverse the relief awarded by the trial court, we must also reverse the portion of the judgment denying the Wongs their attorney fees. (Sharabianlou, supra, 181 Cal.App.4th at p. 1151.) On remand, the court shall consider whether the Wongs are entitled to attorney fees under the applicable law. (See
B. The Cross-appeal: Attorney Fees
On cross-appeal, the Stolers argue that if the judgment is affirmed, we should reverse that portion of the judgmеnt denying them their attorney fees and remand for the trial court to revisit the prevailing party issue. Because we reverse the judgment, the Stolers’ cross-appeal is moot.
DISPOSITION
The judgment is reversed with directions for the trial court to take such action, including the taking of additional evidence if appropriate, and modify its findings, conclusions and judgment to conform to the views set forth in this opinion. The Wongs are entitled to their costs on appeal.
Margulies, J., and Dondero, J., concurred.
A petition for a rehearing was denied June 23, 2015, and the opinion was modified to read as printed above. The petition of defendants and apрellants for review by the Supreme Court was denied August 26, 2015, S227661.